LOBBYING AGAINST SANCTIONS VIS-A-VIS RUSSIA

The European Union should not match the United States in threatening sanctions against Russia. Russia is the EU's most important trading partner after the United States and China , with 123 billion euros of goods exported there in 2012. It is also the EU's most important single supplier of energy products, accounting for more than a quarter of all EU consumption of oil and gas. If the EU were to move with any punitive actions like sanctions, it is important to consider what it would take to reverse any of them down the road.

Any asset freezes and restrictions on Russian investment and trade with West would no doubt provoke an instant tit-for-tat response. Russian lawmakers are already drafting a law that would allow Russia to confiscate assets belonging to U.S. and European companies if it faces sanctions.

Although sanctions are theoretically possible, Russia, unlike the Soviet Union, isn’t an economic island isolated from the rest of the world. It is, in contrast, more or less integrated into global commerce and has grown into the world’s eighth-largest economy. On what economists called a PPP basis, in fact, adjusting currencies for purchasing power, Russia is the sixth biggest economy on earth, well ahead of the UK and France.

Economic sanctions would be extremely difficult to impose on Russia and would be counterproductive. For one thing, many large and powerful Western companies have invested heavily in this vast, resource-rich country and won’t want their interests harmed. On the contrary they will stand by their Russian investments.

Russia has attracted huge foreign direct investment, going way beyond oil and gas. Western car-makers, retailers and household product companies have piled in, keen to tap into Europe’s second most valuable retail market and Russia’s highly educated and relatively cheap workforce. The likes of VW, Ford, Renault and German engineering giant Liebherr have invested billions in production facilities. Other thoroughbred Western corporates such as Pepsi, Unilever, Procter & Gamble and Boeing are also heavily committed – all of which will seriously complicate any attempt to impose economic sanctions on Russia.

Western energy security also looms large, of course. Russia is the world’s third-largest oil producer. Any hint that the flow of Russian crude might be interrupted would cause havoc on global markets. In recent days, as the sanctions rhetoric has cranked up, oil prices have spiked at $2-$3 a barrel. This can only harm Western crude importers such as the UK.

Disruption to natural gas could be even more troublesome, given that Russia is the world’s largest exporter, supplying more than a third of Western Europe’s gas. The situation is complicated by the fact that Ukraine hosts a network of Soviet-era pipelines that supply over half the gas Russia sends to the European Union.

Since 2006, Moscow has twice cut off supplies to Ukraine due to payment disputes – with the knock-on effect of halting gas to Western Europe. During the most recent episode, in 2009, European gas prices spiked a painful 20 per cent in a fortnight, causing howls of protest from Western firms and households.

Gas prices on wholesale forward markets jumped ominously yesterday, by up to 7 per cent, even though this year’s mild winter means Europe’s gas inventories are relatively high. For now, Russia still holds considerable energy leverage that it could wield in response to any economic sanctions. This reality, combined with protests from powerful Western businesses, means EU politicians will struggle to even contemplate the use of draconian sanctions.

Another tool in Moscow’s anti-sanctions armoury is its own fiscal strength. While the Russian economy has lately slowed, with growth currently bumping along at 1.5 per cent, it has expanded tenfold in dollar terms since the late Nineties. This has allowed Putin to pay off almost all the country’s debts – gross government liabilities are less than 10 per cent of GDP, by far the lowest of any major economy, and in net terms Russia is one of the world’s few sovereign creditors. In addition, Moscow has reserves totalling $450 billion, the world’s fourth-largest haul.

Russia will be a big part of the solution to the restoration of financial stability in Kiev, in turn preventing a Ukrainian default from potentially sparking a systemic crisis that could easily affect the West. Before Christmas, Moscow agreed to earmark $15 billion to buy newly issued Ukrainian sovereign debt over the next two years, so allowing Kiev to roll over its obligations. Having bought an initial $3 billion slice, the Russians have shelved successive purchases, leaving Ukraine’s solvency swinging like a Sword of Damocles over global financial markets.

Even if a catastrophe is averted in Crimea, and Russia and the West pull back from the brink, Kiev needs $15-$20 billion to avoid financial implosion – and Russia looks like the only realistic source of such funds.